Category Archives: credit card myths

While most Americans use credit cards (more than 160 million Americans have them), there is still a huge part of America that is unfamiliar with what it means to be a credit cardholder. Credit card issuers have a lot of information in the pages of fine print that most people don’t read (even though they should) or may not know how it applies to them.

Everyone seems to have their own view of how credit cards work, and some of these opinions are little more than myths. Nevertheless, many believe these myths, and it can hold them back from building a good credit score. But we’re here to help clear some of these up. Here are six of these myths and the truth behind them.

1. Credit cards only lead to debt.

It’s true that some people have serious problems with credit cards, but it doesn’t mean that everyone should avoid them. Used responsibly, credit cards help you build a strong credit history, which can result in favorable rates and terms when you apply for a car loan or a home mortgage. Some cardholders never pay interest charges by paying their balances in full every month.

A Credit Card For Every Level of Credit

2. You can build credit with a debit card.

Yes, you have to supply your name, address and Social Security number to get a debit card, but how you use one won’t really help or hurt your credit. Because a debit card doesn’t represent a loan in any way, it won’t even appear on your credit report.

3. Closing your credit cards will increase your score.

This myth is very common, but it’s also completely false. Your credit score improves when you have a strong credit history of on-time payments and a low level of debt (check out these credit cards for people with good credit scores). But by canceling cards, you curtail your credit history. In addition, each time you close an account and lose available credit, you increase your debt-to-credit ratio. As that ratio rises, your credit score falls. (You can see how your credit card balances are impacting your credit score for free each month on Credit.com.)

4. It will wreck my credit if I apply for a new credit card.

This myth is false for the same reasons that lead people to believe closing their credit cards will help their score. Opening up a new credit card account increases your credit history over time, while reducing your debt to credit ratio, both of which can help your credit score. Nevertheless, it’s true that opening up a new credit card will temporarily hurt your credit score, but the effect will be minor and your score essentially ignores the inquiry entirely after a year.

5. You need to carry a balance to build credit.

You can avoid interest by paying your entire statement balance in full, and it won’t hurt your credit score. Again, you help your credit score by having a strong record of on-time payments and a low level of debt, so paying off your debt each month can only help your score.

6. You can’t get a credit card after you’ve been in bankruptcy or foreclosure.

Those who give up on credit cards after they’ve had serious problems with their credit will have a very difficult time rebuilding their score. While you won’t be approved for most standard credit cards, you can qualify for a secured credit card. These credit cards work much like unsecured cards, but it requires the a refundable security deposit before your account can be opened. But when you make on-time payments each month, you can quickly rebuild your credit and qualify for a standard credit card, often after about a year.

When it comes to credit cards, I’ve heard it all. There are so many myths floating around about the magic plastic that you may be tempted to avoid them altogether. Even worse, a lack of knowledge could lead to irresponsible use that could haunt you for years. Unfortunately, I was a part of the latter group and it ended up costing me a ton of cash to get out of the hole.

But you don’t have to fall into the same trap that I did. Here are some credit card myths you should be aware of:

1. Credit card applications are bad for my credit score.

Whether you’re seeking a temporary money fix or looking to take advantage of an irresistible introductory offer, chances are you’ve been warned to proceed with caution when applying for credit cards. And rightfully so; obtaining too many credit cards at once can be a disaster waiting to happen if the cards are not used responsibly or if you’re a credit newbie with limited credit history. Plus, new credit accounts account for ten percent of the unique FICO algorithm used to calculate your credit score.

By contrast, having a stellar credit profile will minimize the damage done to your FICO score. Hard inquiries resulting from credit card applications do have a negative impact on your score, but it is very minimal as the decline will likely only be a few points.

2. It’s okay to exceed the credit limit.

Debt-utilization ratio, anyone?

While your credit card issuer may not assess an over-the-limit fee, that doesn’t necessarily mean it’s OK to continue swiping away even if you’re over the limit. In fact, maintaining a balance that exceeds your credit limit may hurt your credit since the amounts owed account for 30 percent of your FICO score. You could also find yourself with a higher APR for failing to exercise sound debt-management habits.

3. Not carrying a balance is detrimental to my credit health.

To boost your credit score, it is necessary to show lenders you can responsibly manage your debt over time. However, it is not necessary to carry a balance each month. A smarter alternative: once the statement is released, pay the balance in full prior to the end of the grace period. That way, your credit utilization will remain low, you won’t pay interest, and the activity will report to the credit bureaus.

4. All I have to do is make the minimum payment to remain in good standing.

While making the minimum payment by the due date each month will reflect positively on the payment history portion of your credit report, your wallet will take a hit. To illustrate, the minimum payment on Bank of America credit cards only covers 1% of your balance, with the remainder allocated to interest and late fees (if applicable). The higher the balance, the longer it will take to eliminate the outstanding balance.

5. Credit cards come with a 30-day grace period before interest accrues.

If you think all cards come with a 30-day grace period until interest is assessed to your credit card balance, think again. You may be fortunate to have a card that gives you this lengthy time span to eliminate the balance before interest is applied, but some grace periods are 20 days or less.

6. Closingidle accounts will boost my credit score.

“By closing an old or unused card, you are essentially wiping away some of your available credit and there by increasing your credit utilization ratio,” says myFICO. Therefore, it’s best to keep idle accounts open for the sake of this ratio, which significantly impacts your credit score. Also, remember that closing a credit card won’t make it go away.

Have you been tricked into believing any of these lies about credit cards? Please share your experiences in the comments below.